Steve Bagshaw (SB): What do you think are the prominent challenges facing procurement professionals sourcing from China?

Yann Teste (YT): From my point of view, consistency in quality. This is my own challenge – to be sure that the quality I get today is going to be the same tomorrow. I think there is a gap between how the supplier base is managing its manufacturing processes in Europe or in the US and how they manage it here in China.

SB: And in the six years you have been here, how has that changed?

YT: It is improving. We are not the only ones here trying to develop suppliers, and so we are helping each other in developing the supplier base. Mentalities are changing but not at the speed I would expect, so I still need to monitor my supplier base a great deal. A presence here requires a lot of time and effort. That is the main challenge that we have in China.

Marc Magistrali (MMa): There is this consistency factor, and the requirement here is really for hands-on management. So the attention to detail is a key attribute that we look for at all levels, and that normally would be the case elsewhere. But there is a paradox here, because you are looking for this level of detail from all levels of management, including the top management, and normally in Asia, including China, as a director you delegate.

YT: Being a director in Europe is completely different to being a director in China. The involvement you get with the team, the way you have to micro-manage, would be offensive in France.

Manoj Mehta (MMe): Some of it is needed, but the more you do it the longer you keep doing it. It is a line you have to draw very consciously that “I know things are going wrong but I am going to let it go wrong and hopefully my people and suppliers learn a lesson”. If you don’t draw that line, you will be doing it forever.

Holger Schober (HS): It is really a question of what kind of standards we are talking about in terms of quality, technical specification but also in terms of mindset.

Martin Lockström (ML): From our research in China, the tricky issue is bridging expectations between HQ and the rest of the organisation, the requirements and suppliers. The most difficult thing is not necessarily to manage the Chinese suppliers but managing HQ expectations on these kinds of things.

If you are a famous, successful company from the US or Europe in China, you put money on the table and expect the supplier to do what you want. But the critical issue is why this supplier would like to work with you. Just because you are a famous western company doesn’t mean suppliers want to pay attention to you. Suppliers might even think: “Oh, wow, this is a rich, famous Western company, we will charge two times more.”

Wendy Liu (WL): On the consistency of quality, it depends what kind of quality level you want. If you want Six Sigma level you can find it, and if you want a quality level of 90 per cent you still can find that level of suppliers. So when we start a project, first I ask what the background it is and what kind of quality level you want. Sometimes 20 suppliers can make these parts, and we just pick the one that meets our quality requirement, so it is a balance of total cost and of quality with the levels of supplier in that way. There is consistency of quality if our choice and approach are right at the beginning.

Geoffrey Martin (GM): There are quality suppliers out there but you do have to go and spend time and work with them, we all know that. We are developing products or requirements that we don’t fully know how to do ourselves and our suppliers don’t fully know how to do either. Sometimes we have to invest a huge amount of time working with them to develop this capability. We have several supplier quality and development engineers in our team. We are looking for quality components and quality finishing on some of the products that we manufacture in-house, and that is maybe different to some people here. So we have to find it and we can find it. It just takes a long time to do sometimes.

Paul Wang (PW): When you move your manufacturing base to China, how do you protect your intellectual property?

GM: It is a challenge. Pretty much everything we do is IP-sensitive. Our competitive advantage comes from our manufacturing technology, so protecting that is important.

Andreas Abbing (AA): China has made a lot of improvements over the years with regard to IP protection. But there is no alternative to being here. China is the market for the automotive industry, therefore if you have to be here you have to produce locally otherwise you cannot serve the industry.

Oliver Lin (OL): It depends on the partner you select. Some of the suppliers are really following the IP rights or these kinds of regulations; some of the others have no idea at all.

SB: Even if you have an intellectual property agreement, how can that be monitored and how can it be enforced?

YT: It is difficult. You sign an IP or confidentiality agreement or a non-disclosure agreement with the general manager or representative of the company but it doesn’t mean that one of his employees is not going to leave for another job tomorrow.

ML: To a certain extent, it is also the integrity of the people you hire and also clearly it is contractual, but what does that really mean? As I see contracts in China, there are two purposes. One is to hopefully instil a sense of mutual agreement and understanding, and the other is that you have a document that allows you to start a litigation process if necessary. But protecting IP requires different measures.

Chang Zhong (CZ): You need to try to avoid that. Doing business in China, you are here to enter into debate with your partners. You need to build good relationships – that matters. Coming back to the quality level, let me ask a question. What are you buying out of China? You always talk about the goods and services, but in reality you are buying the modern processes of China. You are increasingly buying the industrial products and going more to the technical side. A lot of companies have moved their technical centres to China, because there are brilliant young engineers. Some have moved their headquarters to China. You should look at us in all of these areas and contribute to each step. If you can work with your supplier or partners well, you will enjoy the benefits in the long term.

Heiko Dietz (HD): We often work with the mentality that we are the customer and the Chinese supplier is our supplier. In fact, many of us here may be going after the same suppliers so they have a choice of customers. Suppliers here want to learn and develop themselves. If you want to associate with them as a partner or as an alliance for development or innovation, each helping the other, then there will be a very high-level mutual relationship.

GM: That is what is driving the increasing quality that you are seeing. Because we are all going after that and they realise this is where the value is for them. We are competing for that same space, the same quality suppliers.

HS: If it is the case that they identify you as a partner, I think that quality shouldn’t be a problem. If they identify you as a cash machine, then you might have some problems in quality.

AA: On the specification issue, we would say at Bosch that if we offer a global product in China then it has global quality standard. If a company such as Chery or GD demands a market-specific product then the quality is still Bosch quality, but it has a different specification. So if we have a global company demanding a globally released product, then we have to have the global standards. For a different customer we might offer something different, but on the specification level, not on quality.MMa: But you have to have an open mind. If you are assuming that your specifications are superior and cannot be improved, you will not be open to other people trying to knock it down, while clearly meeting quality standards. We have had a few situations where we have German specifications and they have been made less complex, without sacrificing safety or quality, or Italian specifications perhaps – I am just picking on any nationality – and they have been specified down to quality standards we can accept as a global standard, but that is a much more pragmatic specification. You need to have an open mind and very often in Europe or the US, the West, people take a certain posture and that is unhealthy.

ML: The specifications need to be adapted in order to better tap into the Chinese supplier base. If you set Western standards as a criteria you immediately exclude a large chunk of the supplier base. What is really behind the different standards and how can you translate that into the Chinese equivalent? I also think that the way many foreign companies dictate how to do things – not necessarily looking only at the performance – might exclude a lot of suppliers as well.

I mean, a company such as [battery and automotive manufacturer] BYD gained a large market share not by buying a lot of expensive automation equipment, but simply re-engineering the entire production process. It increased the level of manual labour and was able to do this and still maintain the quality requirements dictated by its customers, and that made it possible for BYD to reduce its costs hugely compared with competitors. BYD is tremendously successful in terms of batteries for home appliances, and now increasingly in the auto industry as well.

So the stringency of processes is like a double-edged sword: it is good for managing quality but it leads to reduced flexibility. That trade-off needs to be balanced.

SB: Do you find yourself reassessing the reasons for the original specification? Do you ask why do we have these European standards or American standards?

MMe: Whatever your internal standards are, once they have been set and your company has made a very specific commitment to deliver on those standards, you can’t change them. Otherwise you start compromising and you are teaching suppliers that you will take second-rate quality. A buyer then knows that you are not serious about quality.

At times in Goodyear Sourcing, we have actually forced our suppliers to destroy millions of dollars of inventory that didn’t meet our specs and that supplier never had a quality problem after that. This is a stance that the company has to decide: either that you are you going to accept second-rate quality or that these are over-specified standards.

WL: I like the points focusing on the technical standards. That is the key point about China sourcing. Two practical points to share: usually the technical standards from an international company are 20 pages in English, German and so on. The explanation or interpretation in Chinese can have a lot of variation, so it is useful just to highlight the key points of those 20 pages so they can focus on critical areas. That will reduce a lot of problems later on.

The second one is to explain the functions. For example, take our slurry pump. In the slurry treatment industry, global customers rely on a lifetime usage for those pumps. They don’t want to repair and maintain it because it is costly but Chinese people don’t understand. They think the parts are used for three years and thrown away, so they would ask why do you have such high warranty requirements. So we have to explain to them, get their buy-in and then things will be easier for them to follow up.

MMa: That’s where leadership comes into play to motivate and encourage them to see why should it be like this, what are the benefits and why they should comply. It is the kind of stuff you can’t communicate through specifications.

WL: Yes, and when you’ve communicated, then the specification is not that difficult to understand.

OL: There is also a way of challenging. You can’t put everything in a specification, but originally it is the requirement. There is always a kind of gap between the requirement and the specification.

YT: That is the clear role of the global sourcing people such as the supplier quality development (SQD) person here in China. This person needs to be the right arm of the European or American SQD. They need to understand what the European person wants, what the supplier can deliver and be the bridge between these two.

SB: How can cultural differences be overcome? Do they present a problem to your organisations?

MMa: Cultural differences become an issue if you make them an issue. You don’t send someone abroad who doesn’t have cultural sensitivity or a certain openness and willingness to trust and operate in a different dimension. If you make nationality a factor it will become one. Every culture is a bit different, but it is a matter of being able to navigate, because we are fundamentally all the same.

Quang Tran (QT): Cultural issues have become less of a problem now. China and MNC [Multinationals in China] have been maturing over the years thanks to strong foreign investment and the learning from others. Business expansion also creates an environment for more interaction and better understanding of various cultural aspects.

AA: If you are in China, don’t try to change China. Try to assimilate and you will have more success.

GM: There is no amount of preparatory work you can do that really substitutes for spending time here and actually going out and talking the suppliers. I am sure that we have all done hours of so-called cultural awareness training but actually being here face to face with the suppliers, meeting them and understanding them, winning them over – that is the thing that makes you successful.

SB: I want to move on to ethical issues and issues of reputation to your brand. What kind of provisions do you make to ensure that people who are supplying your organisations don’t end up on the front page of the papers, and can you avoid that sort of thing?

MMe: That is not only about China, it’s about your corporate business conduct policy. At Goodyear we have a corporate policy: everybody has to read it and sign it every year, which probably doesn’t mean a whole lot.

But within the Goodyear world, the same manual is translated into different languages so that people are at least aware about what cannot be done. The same manual is also distributed to our suppliers so that they understand that if we are behaving in a certain way, we are not being culturally insensitive, we are just working according to our company policy.

Similar to specifications, it is about drawing your boundaries – “Okay, this is where we will compromise and this is where there is no compromise” – because it is about your corporate entity, it is about your corporate brand.OL: Currently I am working for the CHIC Group, which is trying to globalise. We send out a code of conduct for suppliers to sign. One clause says that sourcing people should not be given anything. But the first thing I did when I went into the company was try to convince the CEO that we should be looking at our internal culture first, making sure our people have a clear understanding of the code of conduct and the regulations, and what we are asking from our staff. There were code of conduct training sessions and everyone thought it should be agreed to every year and reviewed. Everybody who signs the contract is obliged to follow it.

ML: That is a good point, that you combine the legal contract with a social contract that you establish by working with the top management of a supplier.PW: I guess that performance from your supplier, on social responsibility, could also damage your company brand, the image. If they hire child labour, if there are accidents to their employees… what is that doing to your project and your products? Also when you select suppliers you need to consider criteria regarding safety, health and environment.

QT: One of the things that we have to be careful about when putting in a corporate policy is that it’s not only about purchasing. It needs to be for the whole organisation so as to not make it only purchasing’s role.

MMe: All Goodyear associates, irrespective of what function they are in, all have to sign the Goodyear business conduct policy statement. It is how we protect our good name.

SB: And how comprehensive is it? I mean, there are so many possible eventualities – can you cover everything?

MMe: Some sections apply to certain functions more than others. For purchasing, it covers how to deal with a supplier, what you can accept, what you cannot accept, what you can say, and so on. When in meetings with competitors, what can you discuss, what you cannot discuss with competitors – those would apply to people in sales and marketing more than in purchasing. It is fairly comprehensive and it covers all functions.

MH: China is probably one of the very few markets where you have senior level purchasing people being caught everywhere. On a weekly basis, whether in Chinese companies or foreign companies, whether they are Chinese managers or in some cases foreign managers they are being caught for taking bribery and cash and all this stuff.

But China does not prosecute them, so those people get fired, and the next thing you know they are working for your competitor. There are a number of rogue employees who have basically been working in this job market for 10 or 15 years who are doing it over and over again. And those people are very smart: they have manners, they have accomplices, they have colleagues who are working with them and sometimes they bring their colleagues with them to the new company and they set up all those new structures to get some money. It is scary how sophisticated these people they are.

MMa: On the one hand you want to put these guys on the news; yet on the other hand it is the company brand that you are actually putting on the news. It is a challenge. I come back to the hiring process, and of course all these controls help, but at the end of the day can you know 100 per cent in China that something is not happening? No one can say.

MH: But when they tell you, “Don’t worry about salary. I will take care of that”, that is when you start worrying and that has happened. In China, everybody is looking for good sourcing talent – anybody who is smart enough and has good credentials and has worked with very good companies before. But do you actually check when you are hiring these people whether they are what they claim to be? It is very hard, nearly impossible.GM: Most previous employers will give you the fact that a person they worked for them for this period of time and that’s it.

SB: And if you asked interviewees about their previous roles and said, ‘Were there any ethical issues’, what would the response be?

MH: A lot of foreign companies close their eyes to it, and I think they closed their eyes until last year because of the recession. Then they realised, “Oh my God, there were a lot of dirty things happening in our China operations” and they started to really look at it. People had more time, their business was slow and people really looked inside at what is happening. But for many, many years before and probably it will start again now this year, companies are closing their eyes because they are too busy, they are expanding, business is booming, profit margins are high, everybody is happy. They might be thinking “It is okay if it takes a few hundred thousand renminbi for a major contract, why not? It is okay, he is a good guy and we want to keep him.”

There have been cases of companies being caught big time for fraud and also for customs and trade compliance. They were cheating big-time, and the entire team was involved, even to the top level. By the way, that is not a Chinese management problem, because a number of foreigners will be involved. So you know I am not pointing fingers here at Chinese people.

YT: This is also our task as managers or leaders, to demonstrate to the team that we don’t accept any compromises.

HS: Let me ask a question to all of you. In your sourcing team, are you 100 per cent sure that all your employees are totally ethical?

YT: Of course not; it is impossible to control everything. You need to trust people and have very good systems of control in place.

MMe: The more vigilant you are and the more system-based protections you have in your organisation the less likely it is that you will have a rogue element, but you can’t be totally sure that everything is ethical.

HS: I don’t think it makes sense to control and monitor all of the activities. But everyone should know random checks are being done. If there is no transparency it opens up a lot of opportunities for those who are less scrupulous. So let everyone know there are random checks in place.

SB: Why are there no convictions? Why would somebody not be prosecuted that you would expect?

AA: What we are discussing here is just the surface of the ocean. Most of this occurs under the surface – in most cases it’s not people simply invoicing extra to get more money from the company. In many cases, I think, there is a private contact. Supplier A is contacting staff member B, at home, by phone, they are talking here and here and this is the way it works. I don’t think this is easy to uncover. You might find out if, say, a colleague has some objections or if they feel unfairly treated or if a supplier is unhappy or if a service provider is unhappy. But in 99 per cent of the cases, it’s not easy to expose. WL: I believe most of the Fortune 500 companies make decisions by a team, for example, so not just one person goes to the supplier to make a decision, “This is the supplier”. There is the quality team, buyer and SDE or other team members to do the assessment and make the team decision. That is transparent.

GM: This is also a good argument for rotating your buyers, from time to time. Not everybody plays the same game so somebody will blow the whistle.

SB: That really is a fascinating topic but I know that Paul wants to ask something about ‘dumping’ and how it affects China sourcing.

PW: Protectionism continues to be a challenge for China sourcing. During the past year there were a lot of test cases raised against the Chinese suppliers, either anti-dumping or anti-subsidiary, for products exported from China to the US or Europe. So does it continue to be a challenge?

AA: If you base your sourcing decision on, let’s say, some favourable incentives that you get at the moment – for instance, some steel or material rates subsidised by the government – I think it is like gambling. There is short-term opportunity, but it may disappear so you have to have a long-term strategy. Cashing in subsidies is not a lasting way of doing business.

GM: But to be honest, how much influence do individual companies have on that? Isn’t that really done at government level, the tariffs that are being set?

MMe: And whether it is a protectionist measure, or anti-dumping, that is up for debate. As a participating company you have zero control and you try to manage these risks by diversifying your supplier portfolio so that you don’t get caught in decisions outside your control.

MMa: Absolutely. Whether it’s anti-dumping, or protectionism, which is a huge likelihood with China becoming stronger and stronger, our job is to manage that risk. We have a global remit to manage that. At Kone, we have a global sourcing organisation but with a continental fall-back approach. In the event something happens in China, because overall our supply base is across the continents, we can fall back into a continental approach. So in the Americas, we use factories with a supply network there; the same thing in Europe and the same thing in Asia. The minute something happens, an earthquake, the ash floating over the UK and elsewhere, we can try to mitigate that risk as well.

This debate took place in Shanghai in May, in association with BrainNet. For more CPO Agenda Executive Debates, visit www.cpoagenda.com/debates